The U.S. Trade Representative Katherine Tai said that the trade agency has found evidence that Beijing is targeting the semiconductor industry for global domination, similar to its buildup in steel, aluminum, solar panels, electric vehicles, and critical minerals. What the Trade Representative seemed to miss is that China is mercantilist, so all industries that require imports or dominated by foreign companies are going to be targeted for domestic replacement manufacturing.
Before we delve into the problem, let’s discuss the solution. It’s twofold. First, to protect national security and US corporations, impose a 60% or 100% tariff on all products made in China containing microchips or circuit panels. This would include cell phones, laptops, appliances, and even children’s toys with electronic components. Second, impose the same tariff on any product made outside of China but containing Chinese microchips or circuit panels. This targets products with Chinese electronic components, regardless of where the final product is assembled. This way, even if China sells its electronic components directly to other countries or as part of sub-assemblies, they are still subject to the tariff.
The issue is that China wants to maximize exports and minimize imports. Today, China is importing about $350 billion to $400 billion worth of microchips and integrated ciruits per year. These chips are then placed into products, and those products are exported to primarily the United States and Europe.
China has three primary motivations for dominating chip manufacturing:
- Economic Dominance: The main focus, China aims to maximize exports and minimize imports. In 2024, China is projected to have a $1 trillion trade surplus. By eliminating the need to import $400 billion in microchips, and adhering to its mercantilist philosophy, China could boost its trade surplus to $1.4 trillion. This represents significant and easily attainable economic gain, a strategy China employs across various industries.
- Geopolitical Leverage: Taiwan, a major player in the chip market, effectively deters a Chinese invasion by holding the global economy hostage. The world’s reliance on Taiwanese chips prevents China from invading until a suitable replacement for Taiwanese production is found. China aims to achieve chip dominance to remove this obstacle and gain leverage over Taiwan.
- Superpower Status and Undermining the U.S.: Many decisions made in Beijing are likely evaluated based on whether they undermine the United States. Currently, U.S. companies like Micron Technology, AMD, and Nvidia dominate the chip industry, along with European companies like ARM and Infineon. These companies export approximately $400 billion worth of chips to China annually. If China were to dominate the semiconductor space within the next few years, it could severely weaken or bankrupt these companies, making the U.S. economy dependent on China for critical semiconductor technology. While the semiconductor industry itself comprises only 0.3% of U.S. GDP, it directly impacts 12% of the overall economy.
The issue is that China’s rise will be restrained by the dictates of the Western rules-based order. Right now, it is certain that China is working with billions of dollars in government grants to reverse engineer ASML, Applied Materials, KLA-Tencor, and Lam Research. If China is going to succeed despite U.S. government restrictions on equipment, then it will need to reverse engineer technology to develop its own.
The problem is the Corporate Culture of the United States. I understand the appeal of short-term profits for companies in any industry, especially when facing potential disruptions like tariffs. However, while any level of tariffs on China will undoubtedly cause pain for everyone in the short term, it’s preferable to endure minor pain now than face far greater consequences in ten years when China has supplanted US makers of micro-chips and semiconductors at lower prices, effectively putting US companies out of business.
If China becomes a semiconductor behemoth, these companies could lose their competitive edge. A mercantilist China could then flood the global market with cheap chips and products containing those chips, effectively barring foreign chip manufacturers from competing. This scenario would lead to a massive decline for related industries in Europe and the USA.
Since China demonstrably operates under a mercantilist system, we must address the problem with a mercantilist solution. China’s goal is to minimize imports, reducing the outflow of dollars spent on semiconductors. These semiconductors are then used in exported products. As long as China manufactures products containing semiconductors, it will have a strong incentive to produce its own semiconductors.
The most effective solution is to convince Europe, Canada, Mexico, and India to reject all products from China containing semiconductors and integrated circuits. This action would significantly reduce China’s incentive to develop its own semiconductor industry.
Regarding the nearly $400 billion in annual semiconductor and integrated circuit sales to China from Europe, Taiwan, South Korea, and the USA, the ideal strategy is to shift end-product manufacturing to other countries besides China. This would redirect sales away from China while maintaining overall demand. Ideally, electronics manufacturing would also be diversified across Southeast Asian countries.
Because China already produces a large volume of legacy chips, these tariffs would likely increase demand for US and European semiconductors. If the US and Europe were to ban the import of products containing Chinese chips and integrated circuits, a significant portion of chip production would relocate outside of China.
This situation presents a difficult choice, forcing US and European corporations to accept short-term losses, potentially impacting stock options and bonuses. However, this action is necessary to safeguard the long-term health of the semiconductor industry, the US and European Corporations that make these products, and prevent its destruction by Chinese dominance.
Summary: Much like the war on drugs, the Mexican government frames it as a US demand issue, while the US government sees it as a Mexican drug supply issue. The semiconductor problem stems from US reliance on Chinese finished products. The proposed solution is to maintain overall demand, allowing US semiconductor companies to sustain sales, but to shift that demand towards products made in other countries. This could be achieved by imposing tariffs on all products containing semiconductors made in China, as well as on products containing semiconductors from Chinese-owned companies, regardless of where the final product is manufactured. US companies’ sales would likely increase as they fill the void left by Chinese legacy semiconductors. Effectively curbing China’s semiconductor industry necessitates significant tariffs on consumer electronics from China.
